Regional forex set for another fraught week

Regional forex set for another fraught week

SINGAPORE (Reuter): Jangled nerves on Asian regional foreign exchange markets are unlikely to be soothed much this week, as traders keep a wary eye out for fresh sideswipes on the political or economic fronts.

Amid the kind of mayhem not seen since the Thai baht's flotation in July, there were some precipitous falls last week, with the Indonesian rupiah, Malaysian ringgit and Philippine peso all plunging to new lows.

After the recent drubbing, sentiment is pretty much at rock bottom but any adverse news will still send corporate investors scrabbling to hedge local currency exposure with U.S. dollars, analysts said.

While many traders are happy to keep clear of the whipsaw markets, there is a compound effect as quite a few are still happy to jump aboard the bandwagon when corporate orders get it rolling.

"Poor sentiment is playing a part but in the case of Indonesia for example it's quite clear there is a very big concern on the part of corporates about the losses they are accepting," said Larry Hatheway, chief economist at UBS in Singapore.

Given private sector debt is about US$60-65 billion and the dollar has risen over 50 percent against the rupiah you run into estimates of balance sheet losses in the region of $15 billion. That is assuming most debt held was unhedged.

"With really no end in sight as to how far the rupiah can fall it's quite clear, even though it's quite expensive in terms of the forward points you pay away, that it's probably time to hedge if it's not too late," Hatheway added.

"These falls are fundamentally driven given the amount of hedging activity we are seeing."

The other major worry among overseas investors who still have money tied up in the region is the shaky financial sector, and problems here spread right across the region.

"The common theme that is running throughout the region right now is a financial sector that people view as vulnerable," said Chiang Yao Chye, Head of Asia Pacific Research at CIBC in Singapore.

"Thailand's financial sector collapsed just like that, and there is concern as to whether any of the others are going to go. Malaysia, the Philippines and Indonesia obviously suffer to a large extent from this."

So, poor sentiment, corporates continuing to hedge and overseas investors worried about the financial sector are all driving currencies lower. Is there anything else?

The answer is yes, two things, politics and the need to act on recent promises to fix acute economic imbalances.

These are really two side of the same coin and analysts say unless politicians get serious, and start to deliver on economic reform, regional currencies will continue to slide.

Malaysian Prime Minister Mahathir Mohamad sent overseas investors running for cover, sparking a four percent fall in the ringgit last Wednesday, by again calling for greater regulation of currency markets.

He repeated his call for tighter curbs at the weekend during a visit to the Argentine capital Buenos Aires.

But Malaysia, and others in the region, depend heavily on overseas investment and this kind of talk simply frightens fund managers who will obviously not want to invest in a country where the regulatory door might be slammed in their face.

There is then the question of politically unpopular measures to heal the regional economies such as Thai Prime Minister Chavalit Yongchaiyudh's promise to cut billions of baht from the budget next year in order to meet the International Monetary Fund's target of a small budget surplus.

Likewise in Malaysia there has been nice sounding rhetoric about scaling back large-scale infrastructure projects.

But unless governments deliver and attempt to address some of the huge economic imbalances, the markets will not give them the benefit of the doubt.

"All these currencies are vulnerable until the governments step up to the plate, do what they say they are going to do and take solid action," UBS's Hatheway said.

Here is the latest state of play of the regional currencies in terms of their fall against the U.S. dollar since the crisis began. The reference point is the close on July 1 to the close on Friday October 3.

Percentage changes have been calculated as the local currency's fall against the dollar not the dollar's rise against the local currency.

July 1 Oct. 3 Fall (%) Malaysian ringgit 2.5240 3.3700 - 25.1 Indonesian rupiah 2,431.00 3,690.00 - 34.1 Thai baht (onshore rate) 25.880 36.35 - 28.8 Philippine peso 26.35 34.60 - 23.8